In 2018, financial institutions in Canada witnessed yet another year of significant expansion in legislation and regulatory guidance impacting their operations.
Key developments in 2018 included the conclusion of the statutory review of federal financial sector legislation, the introduction of a new federal consumer protection framework, a new wave of proposed amendments to the anti-money laundering legislation, finalization of the bail-in framework, revisions to OSFI’s corporate governance guidance, and progress on Canada’s payment modernization initiative.
These and other key legislative and regulatory developments are discussed in our annual update.
REVIEW OF FEDERAL FINANCIAL-SECTOR LEGISLATION
In 2018, the federal government completed the legislative review of federal financial institutions legislation, following public consultations. A number of legislative amendments were introduced by the Budget Implementation Act, 2018, No. 1, which received royal assent on June 21, 2018, and the Budget Implementation Act, 2018, No. 2, which received royal assent on December 13, 2018. The key amendments included the following:
New Consumer Framework
The federal government introduced the long-awaited financial consumer protection framework (Framework) for banks and authorized foreign banks. The Framework, which has not yet been proclaimed into force, is primarily set out in a new Part XII.2 of the Bank Act, with new whistleblowing provisions set out in a new Part XVI.1. The Framework is intended to be comprehensive, but no mention is made of federal exclusivity, signalling that, for now, the government wishes to avoid overt reference to the constitutional question in the legislation. While the Framework is presented as a consolidation of existing requirements, very few provisions that exist today are untouched. The spectrum of revisions ranges from minor drafting changes, including some efforts to modernize, to drafting changes that significantly expand the scope of the provision as it exists today. In addition, there are many brand-new provisions with potentially far-reaching implications. We await the release of the implementing regulations in order to properly assess the scope of the changes to the consumer provisions of the Bank Act. Certain changes are also made to the Federal Consumer Agency of Canada Act (FCAC Act), which will require the Commissioner to name the person who committed a violation and prescribes stronger penalties. For more information about the Framework, please see our November 2018 Blakes Bulletin: A New Federal Financial Consumer Protection Framework.
Broadened Scope of Permitted Activities
One of the more significant changes to the federal financial institutions legislation was to broaden, albeit incrementally, the business powers of federally regulated financial institutions (FRFIs). The legislation permits FRFIs to carry on certain activities beyond the core activities of banking, financial services or insurance. The existing additional powers include engaging in information transmission and management, as well as certain technology activities, but subject to byzantine restrictions, requirements and approvals. The new amendments broaden the scope of the existing additional powers so that FRFIs may (a) collect, manipulate and transmit information generally, without the current limits on the type of information that can be collected, manipulated or transmitted, and (b) develop, design, manufacture, sell and otherwise deal with technology if doing so relates to another permitted activity or the provision of financial services by another entity. The ministerial approval requirement in connection with these activities has also been removed, which will allow FRFIs more freedom and flexibility when engaging with technology. The amendments also added a new power for FRFIs to engage in “any activity that relates to the provision of financial services” by the FRFI or any of its affiliates. This open grant of power is a major departure from the more prescriptive, and restrictive, approach followed in the existing federal financial institutions legislation. Among other things, the new power could potentially allow FRFIs to market the technology and processes they have developed to non-financial entities, opening new sources of revenue for FRFIs and allowing them to compete more effectively with fintechs.
Expanded Networking Power
The amendments also revised the existing networking provisions in the federal financial institutions legislation to expressly allow FRFIs to enter into arrangements with “any person” in respect of carrying on certain activities or providing certain services, and to refer people to “another person” without limitation. These changes will allow FRFIs and other entities (including fintechs) to work together and mutually refer customers, which may help foster greater collaboration in the financial technology space.
Broadened Investment Powers
Under the existing legislation, FRFIs are permitted to make a substantial investment in other financial institutions or entities whose business is limited to certain listed activities or combinations of listed activities, in some cases, subject to an approval requirement. If the entity in which a FRFI wishes to invest carries on any other activities, the investment may be prohibited or restricted by the specialized financing or temporary investment rules. In the past, this has restricted the ability of FRFIs to invest in fintechs and other entities outside of the financial services industry. The amendments enable FRFIs to invest in an entity if a majority of the entity’s business consists of financial services activities of the type that the investor FRFI may engage in (not including the additional powers discussed above). What is considered a “majority” will be prescribed by regulation. Although perhaps not as open as some FRFIs may have wished, these amendments will greatly expand the investment options of FRFIs, particularly in the fintech space where many entities develop technology that is of potential value to FRFIs — as well as technology that is unrelated to financial services —which previously disqualified such entities from investment by FRFIs. The amendments also introduce de minimis thresholds exempting certain permitted investments by FRFIs from approval requirements.
We note that each of the expanded and new powers noted above is subject to restrictions that may be imposed by regulations that are not yet available.
Insurance Company Investments in Infrastructure Entities
The amendments also introduce infrastructure entities as a permitted investment for federally regulated life insurers, subject to various conditions that are to be prescribed by regulation. Notwithstanding this new power, not much is likely to change in life company participation in infrastructure investments unless the punitive capital regime that exists today for such investments is also liberalized.
Deposit Insurance Framework
Amendments are also made to the Canada Deposit Insurance Corporation Act (CDIC Act). Specifically, the provisions relating to deposits made in trust are amended to allow for accounts to be designated as professional trustee accounts, if the depositor attests that they are a professional trustee and provides specified contact information. The deposits of each beneficiary under such an account would receive separate coverage of up to C$100,000 if the professional trustee maintains up-to-date records listing the current name and address of each beneficiary and the amount or percentage interest of each beneficiary. The amendments also allow nominee brokers to make deposits on behalf of another person while protecting that person’s confidentiality. In addition, two new eligible deposit categories have been added for Registered Education Savings Plans and Registered Disability Savings Plans to ensure that each product is covered up to the C$100,000 limit.
For more information on these legislative amendments, please see our April 2018 Blakes Bulletin: Financial Sector Legislative Reform Continues.
PRUDENTIAL REGULATION AND GUIDANCE
The Office of the Superintendent of Financial Institutions (OSFI) continued updating its regulatory guidance in 2018 and published a considerable number of new or revised guidelines, which are discussed below.
Corporate Governance Guideline
On September 18, 2018, OSFI issued the final version of its Corporate Governance Guideline (Revised CG Guideline). The Revised CG Guideline follows Superintendent Jeremy Rudin’s announcement in June 2016, that OSFI intended to streamline and simplify the governance guidance for FRFIs. The Revised CG Guideline provides a clearer delineation of board and senior management responsibilities, removes some of the more prescriptive elements of the previous CG Guideline, and consolidates expectations relating to board responsibilities that are currently set out in OSFI’s capital and risk-management guidelines into the Revised CG Guideline. For more information, please see our September 2018 Blakes Bulletin: A Look Inside OSFI’s New Corporate Governance Guideline.
Bail-in and TLAC Requirements
On March 26, 2018, the federal government released the final version of the bail-in regulations under the CDIC Act and the Bank Act (Bail-in Regulations), which took effect on September 23, 2018. The Canadian bail-in framework was first introduced in June 2016 through amendments to the CDIC Act. Under these amendments, the Canada Deposit Insurance Corporation (CDIC), Canada’s bank resolution authority, was granted the power to convert the specified liabilities and shares of a distressed Canadian domestic systemically important bank (D-SIB) into the common shares of the D-SIB or one of its affiliates (Bail-In Conversion) in order to recapitalize the D-SIB. The Bail-in Regulations now specify the types of liabilities and shares that would be subject to Bail-In Conversion power. Specifically, a debt obligation of a D-SIB is subject to a Bail-In Conversion if it meets all the following criteria:
- The debt obligation is issued by the D-SIB after September 23, 2018. Debt obligations issued before this date are not subject to Bail-In Conversion unless they are amended after that date to increase the principal amount or to extend the term
- The debt obligation has a term to maturity of more than 400 days or is perpetual (specific rules apply in respect of debt obligations with imbedded options)
- The debt obligation is unsecured at the time of issuance. If the debt obligation is partly secured at the time of issuance, the unsecured portion will be subject to Bail-In Conversion.
- The debt obligation has been assigned a CUSIP number, ISIN, or other similar designation that identifies a specific security to facilitate its trading and settlement.
Subordinated liabilities and preferred shares of a D-SIB will also be subject to Bail-In Conversion, but only if they do not qualify as non-viability contingency capital (NVCC) instruments under OSFI’s Capital Adequacy Requirements (CAR) Guideline. Structured notes (with some exceptions), covered bonds and eligible financial contracts, and certain other instruments are exempted from Bail-In Conversion. Under the final version of the Bail-in Regulations, D-SIBs are prohibited from advertising or otherwise promoting a bail-in eligible security as a deposit to a purchaser in Canada.
Concurrently with the adoption of the Bail-In Regulations, OSFI finalized its related Total Loss Absorbing Capacity (TLAC) capital standard for D-SIBs by issuing the the final versions of the TLAC Guideline and the revised CAR Guideline on April 18, 2018. D-SIBs are expected to meet their TLAC requirements by November 1, 2021.
On May 28, 2018, OSFI also issued the final versions of its guidelines on TLAC Disclosure Requirements and Capital Disclosure Requirements. D-SIBs are expected to implement TLAC disclosures commencing with the quarterly reporting period ending on January 31, 2019, and should provide quarterly disclosures at the same time as the publication of their financial statements. OSFI notes that Canadian D-SIBs are expected to have public disclosure practices that are among the best of their international peers.
On August 21, 2018, OSFI issued orders officially designating Canada’s six largest banks as D-SIBs under the Bank Act. OSFI also issued orders to each D-SIB setting the minimum TLAC ratio at 21.5 per cent of risk-weighted assets and the minimum TLAC leverage ratio at 6.75 per cent. The orders are effective November 1, 2021.
Introduction of Net Stable Funding Ratio
On December 19, 2018, OSFI issued a draft version of the Net Stable Funding Ratio (NSFR) requirements under Chapter 3 of the Liquidity Adequacy Requirements (LAR) Guideline, with a target implementation date of January 1, 2020. The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, with an aim to reduce the likelihood that disruptions to the bank’s regular sources of funding will erode its liquidity position and increase the risk of failure. The NSFR limits overreliance on short-term wholesale funding and is a key liquidity adequacy measure, together with the liquidity coverage ratio. Comments on the proposed revisions to the LAR Guideline are due by February 1, 2019.
Basel Capital Reforms and Updates to Bank Capital Guidelines
Following the endorsement by the oversight body for the Basel Committee on Banking Supervision (Basel Committee) of the final chapter of Basel III reforms, on January 12, 2018, OSFI released a letter announcing that it will update the existing capital floor for Canadian banks using advanced approaches for credit risk as a transitional measure before the new output floor proposed by the Basel Committee is implemented (beginning in 2022). For OSFI’s observations on the new Basel reforms, see also Assistant Superintendent Carolyn Rogers’ remarks from January 9, 2018. OSFI’s current capital floor is based on the Basel I capital accord and will now be replaced by a more risk-sensitive capital floor based on the Basel II framework. Specifically, banks using advanced approaches for credit risk will be required to ensure that the risk-weighted assets generated by internal models are no lower than 75 per cent of the risk-weighted assets calculated under the Basel II standardized approach.
On October 30, 2018, OSFI released the revised versions of the Leverage Requirements (LR) Guideline and the CAR Guideline. The revisions to the LR Guideline and the CAR Guideline reflect the incorporation of the Standardized Approach to Counterparty Credit Risk for calculating derivatives exposures, replacing the Current Exposure Method. The LR Guideline and the CAR Guideline were also revised to update the treatment of securitized assets. In addition, the CAR Guideline now clarifies the capital treatment for right-of-use assets resulting from the adoption of International Financial Reporting Standard (IFRS) 16. The revised LR Guideline and CAR Guideline are effective Q1 2019.
On November 20, 2018, OSFI released the final version of the Leverage Ratio Disclosure Requirements Guideline. The revisions accompany the changes to the LR Guideline and the CAR Guideline, and incorporate a new line to capture the treatment of securitized assets that meet the operational requirements for recognition of significant risk transfer. Consistent with the LR Guideline and the CAR Guideline, the revisions will be implemented Q1 2019.
Revised Large Exposure Limit Guideline for D-SIBs
On December 13, 2018, OSFI released Draft Guideline B-2: Large Exposure Limits (Draft Guideline B-2) for public consultation. The original Guideline B-2 was published in 1994 and establishes limits for a bank’s exposure to a single counterparty measured as a percentage of capital. The proposed changes incorporate the Basel Committee’s standard on large exposure risk management, as stated in Supervisory Framework for Measuring and Controlling Large Exposures. The proposed changes include moving the eligible capital base from Total capital to Tier 1 capital, introducing tighter limits for exposures to systemically important banks, and providing for the recognition of eligible credit risk mitigation techniques. Comments on Draft Guideline B-2 are due by February 1, 2019. The new Draft Guideline B-2 applies only in respect of D-SIBs. OSFI has not yet published a revised version of Guideline B-2 for other FRFIs.
Reinsurance Framework Review
On June 21, 2018, OSFI released for public consultation a Discussion Paper on Reinsurance Framework as part of its review of the reinsurance framework for federally regulated insurers. The discussion paper describes the current reinsurance framework and outlines areas of proposed change. Key proposals in the discussion paper aim to address risks associated with large exposures and concentration, particularly for direct writers of property and casualty insurance. The discussion paper includes other proposed changes to the reinsurance framework that would affect all federally regulated insurers. These proposals include enhancements to OSFI’s guidance on sound reinsurance practices and procedures, and changes to the administration of the statutory requirement to obtain the Superintendent’s approval to reinsure with an unregistered reinsurer. The changes are aimed at addressing OSFI’s two key findings of the review, specifically that: (a) risks associated with large exposures and concentration of reinsurance counterparties must be better managed, and (b) adjustments to the capital framework for reinsurance are warranted.
Updates to Insurance Capital Guidelines
On March 29, 2018, OSFI issued the final version of the Life Insurance Capital Adequacy Test (LICAT) Public Disclosure Requirements (PDR) Guideline. The LICAT PDR Guideline outlines five principles upon which OSFI’s expectations are based: disclosures should be (i) clear, (ii) meaningful to users, (iii) consistent over time, (iv) comparable across life insurers, and (v) accompanied by qualitative narrative.
On August 9, 2018, OSFI issued the Mortgage Insurer Capital Adequacy Test (MICAT), a new capital guideline for mortgage insurers. The MICAT outlines the framework that OSFI will use to assess whether a mortgage insurance company maintains adequate capital. The MICAT is a consolidation of OSFI’s prior capital requirements for mortgage insurers and took effect as of January 1, 2019.
On October 10, 2018, OSFI issued the updated version of the LICAT Guideline after a public consultation process. Later, in November 2018, OSFI published the 2019 Minimum Capital Test for Federally Regulated Property and Casualty Insurance Companies Guideline. The revisions reflect the implementation of IFRS 16 and the findings of OSFI’s Discussion Paper on Reinsurance Framework.
OSFI Advisory on IFRS 17
On May 4, 2018, OSFI released an advisory on IFRS 17 Transition and Progress Report Requirements in response to the release of IFRS 17 Insurance Contracts Standard by the International Accounting Standards Board. IFRS 17 replaces IFRS 4 and is effective for annual periods beginning on or after January 1, 2021. Among other things, the advisory notes that after reviewing several factors, OSFI has determined that federally regulated insurers should not adopt IFRS 17 before its effective date of January 1, 2021.
Revised Asset Securitization Guideline for Insurers
On November 26, 2018, OSFI issued the final version of its revised Guideline B-5: Asset Securitization (Guideline B-5) for federally regulated insurers. The revised Guideline B-5 took effect on January 1, 2019 and largely aligns the regulatory framework for the securitization activities of insurers with the operational and qualitative requirements applicable to the securitization activities of banks, as currently reflected in Chapter 7 of OSFI’s CAR Guideline. Guideline B-5 sets out OSFI’s general expectations with respect to securitization transactions by federally regulated insurers and supplements OSFI’s insurance capital guidelines for insurers by specifying the capital treatment for securitization exposures. For more information, please see our October 2018 Blakes Bulletin: OSFI Issues Updated Securitization Framework for Insurers.
Interest Rate Risk Management
On October 5, 2018, OSFI issued for public comment a revised draft of Guideline B-12: Interest Rate Risk Management (Guideline B-12). Guideline B-12 was first introduced in 2005. The revised Guideline B-12 implements Basel Committee guidance related to the framework for Interest Rate Risk in the Banking Book. OSFI intends to implement the revised Guideline B-12 on January 1, 2020.
Use of Bank Words
Effective June 21, 2018, the Budget Implementation Act, 2018, No. 1 amended the Bank Act provisions restricting the use of the words “bank,” “banker” and “banking” (Bank Words). The amendments allow prudentially regulated provincial deposit-taking institutions (such as credit unions) and trust and loan companies to use the Bank Words to indicate or describe their business, including their products or services or the means by which any of those products or services may be obtained, subject to certain conditions.
Following the Bank Act amendments, on August 14, 2018, OSFI issued a notice reinstating its June 2017 advisory, which set out OSFI’s interpretation and administration of the restrictions on the use of the Bank Words. OSFI now expects compliance with the Bank Words restrictions by (a) August 31, 2019, for domain names and information contained on websites, other electronic media and in print materials, and (b) August 31, 2020, for information contained on physical signage. For more information, please see our September 2018 Blakes Bulletin: Update on the Use of the Words “Bank”, “Banker” and “Banking” by Non-Banks.
Updated OSFI Transaction Instructions
In August 2018, OSFI updated its transaction instructions for purchase or redemption of shares or membership shares and reduction of stated capital.
OSFI also released a revised version of its Guide to Intervention for Federally Regulated Property and Casualty Insurance Companies in March 2018.
As noted above, one of the key legislative developments of 2018 was the introduction of the long-awaited federal financial consumer protection framework. This was preceded by the Financial Consumer Agency of Canada’s (FCAC) report on Canadian banks’ retail sales practices, the introduction of the new supervision framework, and certain other developments, which are discussed below.
Report on Canadian Banks’ Retail Sales Practices
On March 20, 2018, the FCAC published a report on its review of Canadian banks’ retail sales practices (Sales Practices Report). The Sales Practices Report focused on retail banking sales practices undertaken by Canada’s six largest banks to identify and evaluate risks to consumers. The Sales Practices Report found that employees in retail banking are encouraged to sell products and services and that rewards are based on sales success. Although the potential for misselling is increased in such environments, the FCAC ultimately concluded that there was no widespread misselling in Canada. For more information about the FCAC’s findings, please see our March 2018 Blakes Bulletin: FCAC Concludes No Widespread Mis-Selling by the “Big Six” Banks.
Report on Best Practices in Financial Consumer Protection
On May 14, 2018, the FCAC published its Report on Best Practices in Financial Consumer Protection (Best Practices Report). The Best Practices Report was the result of the federal government’s request that the FCAC undertake a review of the legal landscape’s underlying financial consumer protection regimes at the federal, provincial and international level, and preceded the introduction of the new consumer framework under the Bank Act, discussed below. The Best Practices Report identifies 11 recommendations for a strong financial consumer protection framework informed the introduction of the new financial consumer protection framework. For more information, please see our May 2018 Blakes Bulletin: FCAC Report Identifies 11 Best Practices in Financial Consumer Protection.
New Supervision Framework
On October 1, 2018, the FCAC published the final version of its Supervision Framework, which came into effect on that date. The Supervision Framework remains relatively unchanged from the previous drafts, published in April 2017. However, the FCAC made some key changes to its methods of enforcement. Despite the release of the Supervision Framework, a final version of the Publishing Principles for FCAC Decisions has yet to be published. These principles will clarify how the FCAC will publish information about notices of violation, notices of decision and notices of non-compliance. For more information, please see our October 2018 Blakes Bulletin: Final Financial Consumer Agency of Canada Supervision Framework in Effect.
New Compliance Bulletin B-7
In September 2018, the FCAC issued Compliance Bulletin B-7, Role of payment card network operators in ensuring participant compliance with the Code of Conduct for the Credit and Debit Card Industry in Canada (FCAC Bulletin). The FCAC Bulletin provides guidance with respect to the FCAC’s Decision #126 (May 15, 2017) and sets out the FCAC’s expectations with respect to the obligations of payment card network operators (PCNOs). Specifically, the FCAC Bulletin expects PCNOs to:
- Adopt a proactive compliance approach which includes establishing and implementing control measures and tools to prevent, monitor, and enforce
- Ensure their participants comply with the Code of Conduct for the Credit and Debit Card Industry in Canada by implementing the measures and tools referred to in paragraph (1)
- Ensure that mechanisms are in place to action FCAC requests, Guidance and Compliance Bulletins, in a timely manner
- Demonstrate, upon request, how the expectations in paragraphs (1), (2) and (3) are being met.
New FCAC Decisions
The FCAC issued four decisions in 2018:
- Decision #129 (February 8, 2018): Released in relation to a bank that failed to disclose all charges required by the Disclosure of Charges (Banks) Regulations. After introducing a new system, the bank charged some of its customers fees that were inconsistent with the information disclosed. Commercial customers were also overcharged as a result of billing errors.
- Decision #130 (April 4, 2018): Released in relation to a bank that failed to provide accurate disclosure statements respecting the prepayment of new and renewed mortgage agreements, in accordance with the Cost of Borrowing (Banks) Regulations.
- Decision #131 (August 15, 2018): Released in relation to mortgage renewal documentation provided by a bank that disclosed the mortgage payment frequency as “accelerated” when it was not, contrary to the Cost of Borrowing (Banks) Regulations.
- Decision #132 (November 29, 2018): Released in relation to a bank that did not correctly disclose the cost of borrowing in relation to certain credit products, as set out in the Cost of Borrowing (Banks) Regulations. The formula to calculate interest payable that was provided to customers generated incorrect results and was different from the formula actually used to calculate the interest charged.
ANTI-MONEY LAUNDERING AND SANCTIONS
There were significant developments in 2018 impacting Canada’s anti-money laundering and anti-terrorist financing (AML/ATF) regime, including proposed amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and major discussion papers released by the Department of Finance and House of Commons Standing Committee on Finance. These and other developments impacting the PCMLTFA and sanctions legislation are discussed below.
Department of Finance Discussion Paper
On February 7, 2018, the Department of Finance released a discussion paper reviewing Canada’s AML/ATF regime in connection with Parliament’s five-year legislative review of the PCMLTFA. The discussion paper sets out policy considerations for potential amendments to the PCMLTFA. The more significant of these measures consider subjecting new lines of business to the AML/ATF framework, such as privately-owned automated teller machines (ATMs), armoured cars, high-value goods dealers, and finance, lease and factoring companies. The discussion paper also proposes amendments to the requirements relating to politically exposed persons, beneficial ownership, and potential AML/ATF information sharing between government agencies and the private sector. For more information regarding the discussion paper, please see our February 2018 Blakes Bulletin: Department of Finance Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.
Politically Exposed Persons
On May 11, 2018, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) published its Frequently Asked Questions in relation to Politically Exposed Persons in Canada and Heads of International Organizations (FAQ). The FAQ addresses certain questions relating to the definitions of politically exposed persons under the PCMLTFA.
Proposed Amending Regulations
On June 9, 2018, the Department of Finance released long-awaited proposed amendments to the PCMLTFA regulations. Highlights of the proposed amendments include the regulations of virtual currencies, businesses providing foreign money services and pre-paid products. In addition, the life insurance sector is proposed to become subject to the same requirements as other financial entities in respect of any loan or pre-paid products that they offer. While the identity verification requirements are less burdensome under the proposed regulations, the recordkeeping requirements have expanded considerably, especially for electronic funds transfers. It is expected that a final version of the amending regulations will be released later in 2019. For a detailed review of the proposed amendments, please see our June 2018 Blakes Bulletin: The Good, the Bad and the Ugly: Revised Regulations to PCMLTFA.
Standing Committee on Finance Report
In November 2018, the House of Commons Standing Committee on Finance released its report, Confronting Money Laundering and Terrorist Financing: Moving Canada Forward (Standing Committee Report). The Standing Committee Report makes 32 recommendations on proposed modifications and additions to the Canadian AML/ATF regime. The recommendations outlined in the Standing Committee Report relate to various aspects of the PCMLTFA, including the requirements respecting beneficial ownership and politically exposed persons, and AML regulation in various industries, such as white label ATM services and armoured cars, real estate, luxury goods, casinos and cryptocurrency. For more information, please see our November 2018 Blakes Bulletin: Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime.
On May 1, 2018, FINTRAC updated its guidance on Beneficial Ownership Requirements to address industry feedback regarding the challenges of independently confirming the accuracy of beneficial ownership information. Previously, FINTRAC took the position that, while various means could be used to obtain beneficial ownership information, only official documentation could be relied on to confirm the accuracy of the information obtained. In recognition of the fact that such official documentation does not exist in most cases, this guidance has now been updated to reflect FINTRAC’s amended position that, once the beneficial ownership information is obtained, various reasonable measures may be used to confirm the accuracy of beneficial ownership information, including reliance on certification.
In this respect, we also note that the Budget Implementation Act, 2018, No. 2 amended the Canada Business Corporations Act (CBCA) to improve the beneficial ownership recordkeeping requirements for business corporations. In particular, under the amendments, a CBCA corporation is required to maintain a register of individuals with significant control of the corporation. The amendments, which, among other things, are intended to assist financial institutions to comply with their beneficial ownership determination requirements under the PCMLTFA, are set to come into force in June 2019. For more information, please see our November 2018 Blakes Bulletin: Beneficial Ownership: New Developments.
Assessment on Terrorist Activity Financing
On December 13, 2018 FINTRAC published its Terrorist Financing Assessment: 2018 (Assessment), which provides an assessment of the terrorist activity financing risks presented by various countries. The Assessment outlines financial and geographic indicators to assist businesses in identifying and reporting suspected terrorist activity financing.
Suspicious Transaction Requirements
On January 21, 2019, FINTRAC updated its industry guidance in respect of suspicious transaction reporting by releasing three new guidance documents on Transaction reporting requirements, Reporting suspicious transactions to FINTRAC and What is a suspicious transaction report?. For more information, please see our January 2019 Blakes Bulletin: New Guidance from FINTRAC: Expanding Suspicious Transaction Requirements.
On January 11, 2018, the government amended the regulations under the United Nations Act in respect of North Korea. The amended regulations continue to impose asset freeze, screening and reporting obligations in respect of designated persons. They also add a new prohibition against forming, maintaining or operating a joint venture or a cooperative entity with North Korea or with any person in North Korea, and add new goods subject to the prohibitions against the sale or purchase of certain goods to or from North Korea, among other amendments.
On May 16, 2018, the government published amended regulations under the United Nations Act and the Special Economic Measures Act in respect of Libya.
On May 30, 2018, the government amended regulations under the Special Economic Measures Act in respect of Venezuela to include additional listed persons.
On June 25, 2018, the government amended the regulations under the Special Economic Measures Act in respect of Myanmar (formerly Burma) to include additional designated persons.
On October 10, 2018, new regulations under the United Nations Act implemented the United Nations Security Council’s resolutions on Mali, which include asset freeze, screening and reporting obligations in respect of designated persons.
On November 29, 2018, Canada’s Minister of Foreign Affairs announced sanctions against 17 Saudi Arabian nationals. The individuals have been designated in the regulations made under the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law). The designations target Saudi Arabian nationals who are, in the government’s view, linked to the murder of journalist Jamal Khashoggi.
For more information about amendments to sanctions legislation, please see our December 2018 Blakes Bulletin: Canada Imposes Sanctions Against Saudi Arabian Nationals and Blakes Bulletin: Primer on Canadian Sanctions Legislation.
OPEN BANKING, PAYMENTS MODERNIZATION & OTHER DEVELOPMENTS
In early 2019, the Department of Finance requested input from the public and other stakeholders on its consultation paper titled A Review into the Merits of Open Banking. The consultation paper discusses the concept of open banking and outlines the associated risks and benefits. The consultation paper is part of the first phase of a two-phase review of open banking led by the Advisory Committee on Open Banking, established in September 2018. The federal government first announced its intention to study open banking in February 2018 in its Budget 2018. For more information, please see our January 2019 Blakes Bulletin: Canada Seeks Input on Open Banking Framework.
On February 23, 2018, Payments Canada completed its consultation on the proposed payment modernization project. The proposed Modernization Target State (Target State) contemplates the following changes to Canada’s core payments clearing and settlement systems:
- Payments Canada proposes to replace the current Large Value Transfer System (LVTS), Canada’s high-value payment system that facilitates real-time payments with transaction finality, with a new system (Lynx). Lynx will be structured to be better aligned with the Bank of Canada’s risk-management standards for systemically important payment systems.
- A new Settlement Optimization Engine (SOE) will eventually replace the existing Automated Clearing Settlement System, Canada’s core retail payment system and will be structured to be better aligned with the Bank of Canada’s risk management standards for prominent payment systems.
- Payments Canada also proposes to introduce a new real-time rail for immediate retail payments. Payment service providers that are not prudentially regulated financial institutions (PSPs) may have direct access to the real-time rail under the Target State.
The Target State consultation was followed by the publication of a consultation paper by the Department of Finance on the review of the Canadian Payments Act. The consultation paper considered in greater detail the proposal to allow PSPs to participate in the new real-time rail and SOE. Specifically, the consultation paper proposed to create a new class of associate membership that would be open to PSPs and would provide eligibility for associate members to participate in exchange and settlement of payment items on the real-time rail. The consultation paper notes that greater access to the real-time rail (and perhaps the SOE) may be facilitated by the proposed retail payments oversight framework, which would subject PSPs to principles-based oversight, including security and risk-management practices.
Currently, PSPs are generally unregulated, except in limited circumstances. PSPs regulated under the retail payments oversight framework would be eligible to apply for associate membership. Like current members, associate members would not automatically be able to exchange, clear or settle payments directly on Payments Canada’s systems. Associate members would have to meet additional system-specific requirements before gaining access to the real-time rail. To settle directly through the real-time rail, associate members would have to meet requirements set by the Bank of Canada to obtain a settlement account. The consultation paper also states that associate members would not be eligible to participate in systemically important systems such as the LVTS and, in the future, Lynx; however, associate member access to the SOE is considered. Specifically, consideration is being given to whether associate members should be eligible to directly or indirectly exchange electronic payment items on the SOE exchange network. Associate members would not be eligible to settle items exchanged on the SOE, but would have to have a settlement member do so for them. For more information on the consultation by the Department of Finance, please see our June 2018 Blakes Bulletin: Further Consultation on Payments Canada – And More to Come.
On December 19, 2018, Payments Canada published a Modernization Delivery Roadmap 2018 Update (Roadmap) as a follow-up to the Target State. The Roadmap provides revised timelines for the implementation of the modernization initiative.
Resolution Framework for Clearing and Settlement Systems
The Budget Implementation Act, 2018, No. 1 introduced a resolution framework for systemically important or prominent clearing and settlement systems that are designated by the Bank of Canada under the Payments Clearing and Settlement Act (PCSA). The resolution framework will apply only to those designated systems whose clearing house is in Canada (Canadian Designated Systems). Under these amendments, which have not yet been proclaimed into force, the Bank of Canada will act as the resolution authority for all Canadian Designated Systems and must develop and maintain a resolution plan for each such system. The Bank of Canada may declare a Canadian Designated System non-viable if it concludes that the Canadian Designated System has ceased, or is about to cease to be viable, and the Canadian Designated System cannot restore its viability on its own initiative. A declaration of non-viability imposes a stay in respect of all contracts with the Canadian Designated System’s clearing house or central counterparty, subject to certain exceptions for eligible financial contracts. Upon declaration of non-viability, the Bank of Canada may be appointed as receiver of the Canadian Designated System, or the shares of such system’s clearing house (other than Payments Canada) may be vested in the Bank of Canada. The Bank of Canada will have broad powers in respect of a non-viable Canadian Designated System and may transfer its assets to, and arrange for the assumption of its liabilities by, a bridge clearing house designated by the Bank of Canada or other third parties. Other amendments to the PCSA include making oversight information in respect of designated clearing and settlement systems confidential, similar to the confidentiality requirements for supervisory information relating to FRFIs. The scope of the oversight information that would be subject to this non-disclosure requirement will be set out in regulations, which have not been published yet.
Canada-United States-Mexico Agreement
On September 30, 2018, Canada, the United States and Mexico signed the Canada-United-States-Mexico Agreement (CUSMA) – known as the United States-Mexico-Canada Agreement (USMCA) in the U.S. – which is intended to replace the North American Free Trade Agreement. The CUSMA addresses several digital trade issues, including data localization. Once ratified, Article 17.20 of the CUSMA will require changes to Canadian legislation that currently requires FRFIs to maintain specified records in Canada. The CUSMA is expected to take effect on January 1, 2020, although Article 17.20 will not take effect for another year to allow time for the federal government to amend domestic legislation accordingly. For more information, please see our October 2018 Blakes Bulletin: USMCA to Remove “in Canada” Record-Keeping Requirements for Financial Institution Sectors.